Australian panel proposes sharp boost in student loan interest rates

Submitted by Bernard Lane and Julie Hare for The Australian on May 2, 2014 - 3:00am

Students should pay higher interest on their loans and relieve the pressure on the public purse, a committee studying how to control spending by the Australian government recommends.

“The interest rate should be increased to a level which reflects all (the commonwealth’s) costs in making the loan,” says the report by the Commission of Audit,[1] noting that the current rate falls below the government borrowing rate.

Australian National University economist Bruce Chapman, architect of the internationally adopted income-contingent loan scheme, pointed to the New Zealand experience.

He said that New Zealand had adopted Australia’s system but imposed an interest rate in line with the government cost of borrowing.

A graduate returning after a short spell overseas could find a $20,000 debt transformed into $35,000, thanks to compound interest, he said.

It was perceived as unfair, he said, and proved so politically unpopular that the full cost recovery interest rate was abandoned.

The audit report also urges “a rebalancing” of public and private contributions to the cost of degrees, so that students would pay 55 percent, rather than the current 40 percent, of the cost of their educations, thereby delivering savings to government.

Higher education expert Andrew Norton, of the Grattan Institute, said the report failed to establish a clear basis for the nominated level of public subsidy.

He was not opposed in principle to students taking on a greater share of the cost since, on average, they are likely to go on to above-average earnings.

“My concern is that this (55 percent) is just another, different number plucked out of the air. It’s not really reorganizing the higher education system on a more rational basis.”

The report acknowledges that Australian undergraduates “are currently paying among the highest levels of tuition fees in the world” but emphasizes the private benefits that flow from higher education.

It defers any deregulation of fees, saying it is unclear whether market forces are strong enough to lead to real price differentiation between courses and institutions.

The vice chancellor of the University of New South Wales, Fred Hilmer, said it was “disappointing” that the sector was expected to wait another year for a report on fee deregulation from Education Minister Christopher Pyne.

“There is a momentum for change and acceptance in the university community that I haven’t seen before,” he said.

“It would be a shame not to build on this momentum and put in place a competitive model focused on diversity and excellence.”

Leo Goedegebuure, director of the L.H. Martin Institute at Melbourne University, said the proposal to shift the cost burden so dramatically towards students was “unfair.”

“We already have a situation where students pay a significant amount of money and there are large public benefits to having a highly educated population,” he said.